Aug. 27 (Bloomberg) -- Fonterra Cooperative Group Ltd., the
world’s biggest dairy exporter, said it will pay NZ$615 million
($515 million) for a stake in a Chinese infant formula maker as
it seeks to tap the nation’s lucrative baby milk market.

The New Zealand company will buy a stake of as much as 20
percent in Beingmate Baby & Child Food Co Ltd., a subsidiary of
China’s fourth-largest infant formula maker, it said today. The
companies also plan to set up a joint venture to buy Fonterra’s
Darnum plant in Australia and a distribution agreement to sell
Anmum, Fonterra’s own baby milk brand, in China.

The deal will allow Fonterra to use Beingmate’s
distribution network for its products, helping the New Zealand
company increase the number of sales points in China much faster
than if it expanded on its own, said Torsten Stocker, a Hong
Kong-based partner at consulting firm AT Kearney Inc. Fonterra
is seeking to boost its business in a country where the baby
formula market is forecast to more than double from last year to
191 billion yuan ($31 billion) by 2017.

“There is still a large number of infants being born and
there is still a lot of underlying growth,” Stocker said.
“Breastfeeding rates are lower than in other markets, and
parents will always buy the best for their babies.”

The tie-up will also help Beingmate guarantee a supply of
quality raw materials, which is difficult to find in the
country, Stocker said.

The tie-up with Beingmate is “a game-changer that will
provide a direct line into the infant formula market in China,
which is the biggest growth story in pediatric nutrition in the
world,” Fonterra’s Chief Executive Officer Theo Spierings said.

Food Scares

The alliance comes a year after a whey protein scare
prompted product recalls across Asia by baby formula makers such
as Danone and Abbott Laboratories and also caused a temporary
halt on imports to China. The New Zealand dairy company said its
baby formula may have been tainted with a potentially fatal
botulism-causing bacteria. The incident was later proved to be a
false alarm.

The Chinese infant-formula market is worth NZ$18 billion
and will grow to NZ$33 billion by 2017, Auckland-based Fonterra
said. The dairy firm already sells Anmum supplements for
pregnant women in the Asian nation and started sales of its
Anmum-brand infant formula in the southern Chinese city of
Guangzhou last year.

Expanding in China

Fonterra said it will start the process of issuing a
partial tender offer to gain as much as a 20 percent stake in
Shenzhen-listed Beingmate Baby at 18 yuan a share, 25 percent
more than the last closing price of 14.36 yuan in June, when the
stock was halted. Fonterra will also spend NZ$555 million to
increase milk processing capacity in New Zealand, it said in a
separate statement today.

Shares in the Fonterra Shareholders’ Fund, a publicly
traded trust that tracks the cooperative’s dividend payout and
earnings, rose 0.2 percent to close at NZ$6.13.

Hangzhou Beingmate Group, the parent of Beingmate Baby, is
China’s fourth-largest infant formula maker with 9.9 percent of
the market last year, according to industry researcher
Euromonitor International. China’s baby milk market is dominated
by foreign companies, with Mead Johnson Nutrition Co. being the
largest, followed by Nestle SA and Danone, Euromonitor data
show.

Tainted Milk

Foreign infant formula makers gained market share in China
as consumers lost confidence in local brands after domestic baby
milk powder tainted with the chemical melamine killed six babies
in the country in 2008.

Murray Goulburn Cooperative Co., Australia’s biggest milk
processor, is also seeking to meet growing Chinese demand for
formula, Managing Director Gary Helou said today in a phone
interview. The producer is investing A$127 million ($118
million) to expand production of infant nutrition, consumer
cheese and dairy beverages to raise exports to China and the
Middle East, he said.

Fonterra is forging alliances and developing farms in China
to tap demand for milk in the world’s second-biggest economy.
China is the largest customer for New Zealand dairy products,
which account for almost a third of the nation’s exports.

“By working together with Beingmate, we will strengthen
our infant formula brand presence in China and link China to
high quality ingredients from New Zealand,” Spierings said.
“We will also work with Beingmate to evaluate mutual
investments in dairy farms in China.”

Price Fixing

The New Zealand farming co-operative, which makes products
such as Anchor butter and Anlene milk, has faced some roadblocks
in China. Chinese authorities fined Fonterra, along with other
overseas companies, about 4.5 million yuan in August 2013 for
fixing product prices.

The company cut prices for its Anmum supplements for
pregnant women by 9 percent last year after the National
Development and Reform Commission, China’s top economic planning
agency, began an investigation that month into the pricing of
their products.